AS BEFITS A deal in the medical industry, this one has been rather hard to swallow. But on December 5th, eight months after Takeda, Japan’s largest pharmaceutical firm, said it was interested in buying Shire, an Irish-headquartered drugmaker of a similar size, shareholders at last voted to approve the acquisition. The purchase will cost Takeda $56bn in cash and new shares. Since the initial news of the deal the firm’s share price has fallen by 25%.
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Takeda’s acquisition is unusual. It is by far the largest foreign buy-out ever executed by a Japanese firm (even though the country’s outbound merger-and-acquisition activity is surging). Nor was Shire considered a likely target. Acquiring firms usually seek new technologies or overlaps that allow cost-cutting. Shire does have a strong pipeline of new molecules, but the portfolio did not complement any large drugmakers’ existing suite of drugs, including that of Takeda.
Powerful domestic pressures are encouraging Japanese drugmakers to look abroad. An ageing population has put pressure on Japan’s government-run health-care system, which accounts for two-fifths of the country’s drug spending. The health ministry is hard at work promoting generic drugs and pushing down prices.
But few groups have taken as drastic action as 237-year-old Takeda, which in 2014 brought in as its leader a Frenchman, Christophe Weber. He has noted that Japan’s drugs market is only 7% of the global one, and that “if we want to be successful, we have to be successful outside of Japan”.
A slim pipeline of new drugs and fiercer competition also boded ill for Takeda’s revenues. Slowing sales of Velcade, a cancer drug, were expected to wipe a fifth off its profits in the next few years. The firm had only two new drugs with blockbuster potential in late-stage clinical trials. Buying Shire does help there: the drugmaker earns two-thirds of its revenues in America and its portfolio of rare-disease drugs will bolster Takeda’s revenues.
But the sheer size of the deal elicited resistance. A group of shareholders led by Kazuhisa Takeda, a descendant of the founding family and a former board director, and Shigeru Mishima, a former stockmarket analyst, was bitterly disappointed by this week’s approval. On the question of why the group opposed the acquisition, Mr Mishima cites “risk, risk, risk!”. Local rivals, Astellas and Daiichi Sankyo, which have chosen to make smaller acquisitions, of American biotechnology companies, have seen their shares rise by 18% and 43% respectively, as Takeda’s have fallen.
The dissidents may have a point. Scope for cost-cutting is relatively limited. It will saddle the combined entity with $48bn of net debt, or over five times its expected annual operating earnings. To bring the huge cost of servicing this down, Mr Weber will have to dispose of promising products worth $5bn after the firms merge, on January 8th. He claims strong combined cashflow will help pay down debt quickly, but Shire’s haemophilia drugs, worth a quarter of its revenues in 2017, are threatened by new drugs from other big pharma firms.
Mr Takeda and other dissident shareholders do not deny the company needs to diversify its range of products. Nor, they claim, are they against acquisitions or globalisation. But the dose makes the poison. Swallowing Shire could prove toxic.